Eterna Plc FY 2020 Report: Falling Revenue with Forced Profit

Monday, April 62, 2021, 10:00 AM /by Tosin Ige, Proshare Research/ Header Image Credit: Eterna Oil Plc

Downstreamoil & gas company, Eterna Oil Plcstarted 2020 with a win in its case against the Economic and Financial CrimesCommission (EFCC) on alleged fuel subsidy fraud, nevertheless, like mostcompanies in the downstream oil and gas market, the retailer faced sizeableCOVID-19-induced headwinds.

The company saw a major drop in its gross revenueby -74.39% year-on-year (Y-o-Y) from N229.27bn in 2019 to N58.72bn in 2020. Another sore point for Eterna Oil Plc was itshuge foreign exchange losses that settled at N354min 2020 down from a gain of N33m in 2019.Nevertheless, the group squeezed out some earnings growth by slicing downoperating costs and deferring a large proportion of its taxes.

Key Highlights

The group'stotal revenue in 2020 fell by -74.39% Y-o-Y from N229.27bnin 2019 to N58.72bn in 2020.
The company'scost of sales (COS) dipped by -76.28%Y-on-Yfrom N224.32bn in 2019 to N53.21bn in 2020.
Eterna Oil's grossprofit for 2020 increased to N5.51bn from N4.95bnin 2019, representing a growth of +11.27%Y-o-Y.
The operating profit grew by +12.90% Y-o-Y from N1.34bn in 2019 to N1.54bn in 2020.
The group's financecost fell by -31.67% Y-o-Yfrom N1.49bnin 2019 to N1.02bnin 2020.
Profit before tax (PBT) increased by +391.88% Y-o-Yfrom N111.44min 2019 to N548.15m in 2020.
The group's taxation also decreased by -253.64% Y-o-Yfrom N255.73min 2019 to (N392.90m) in 2020.
Eterna's profit after tax (PAT) rose notably by +752.19%Y-o-Y to N941.06m in 2020 from N144.29m in 2019.
Total assets roseby +25.35% Y-o-Yfrom its N28.533bn in 2019 to N35.77bn in 2020.
The group's total equity climbed up by +7.58% Y-o-Y in 2020.
Earnings per share rosefrom a negative value in 2019 by +754.55% Y-o-Y to0.72 in 2020. A surprising repair of earnings during a COVID headwind.

Share Price & Volume Movement- Wavering Sentiment

Eterna'sshare price had a tidal-wave trend between December 2019 and the end of Q1 2021. The share price saw a downward trend at thebeginning of 2020. The price picked up slightly at the end of Q1 2020, dippedagain in April ending and increased relatively in the following month. Overthese periods, the share price maintained quite low levels given theuncertainty created by the pandemic. This trend continued towards the end of Q3when it saw a historical low price of N1.90year-to-date on 31st August 2020, before increasing to a relatively high in October2020 attributed to the positive sentiment about the business environment aslock downs were eased in major sectors and calmness returned to major citiesafter the youth protests against alleged police brutality. Momentum on thelikely resurgence of the virus again drove down the price in November 2020 but itrecovered to its N4 to N5 rangein Q4 2020 to the end of Q1 2021 as investors continued to hope for a betterfuture.

Interms of volume, Eterna had many periods of high trading volumes against fewperiods of low trades. The volume traded low in December 2019 but increasedsharply in January and followed a downward trend to March 2020 as investorswere uncertain of the company's future earning given the intensity of thepandemic within the period. The volume rose again as lock downs were relaxedbut dipped significantly in August 2020 and maintained upward volumes throughthe rest of the year except in November ending when it fell drastically again, followingthe sharp increase in the share price in previous months. The company share hasbeen trading low since the wake of the new year 2021 (see chart 1 below).

Chart 1: Eterna SharePrice Movement Vs Volume of Shares

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*share price andvolume as of 31 March 2021

Source: NSE, ProshareResearch

Revenue and Profit: Back to Base

Eterna'stotal revenue fell significantly to the lowest in six years by -74.39% Y-o-Y from N229.27bnin 2019 to N58.72bn in 2020 due partlyto decline in sales and partly due to changes in revenue reporting in 2020 (see chart 2below). A breakdown of the 2020 revenue showed that the Group derived85% of its revenue from retail and industrial fuels up from 24% in 2019; 13%from lubricants and petrochemical up from 4% in 2019; and 2% from trading activitiesdown from 72% in 2019. The group restructure its revenue composition throughthe amendment of contracts for trading activities (bulk importation and directsales to customer facilities) which made it an agent in the transaction,recording only premium and commission on its transactions. This brought downthe share of trading activities in its revenue by -97.22%Y-o-Y in 2020.

Chart 2: Eterna TotalRevenue 2015-2020 (N'bn)

Source: EternaFinancial Statement, Proshare Research

Thegroup's profit before tax rose by +391.88% Y-o-Yfrom N111.44m in 2019 to N548.15m in 2020 but was lower than the group'sprofit before tax in years before 2019 (see chart 3 below). The increasein PBT was driven by large falls in finance income and finance cost. Specifically,finance income dipped by -87.72% Y-o-Y from N239.10min 2019 to N29.37m in 2020 due todeclines in interest income on short- dated deposits. Finance cost also dippedby -31.67% Y-o-Yto N1.02bn in 2020 from N1.49bn in 2019 due mainly to the drop ininterest on long-term financing.

Chart 3: Eterna ProfitBefore Taxation 2015-2020 (N'bn)

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Source: EternaFinancial Statement, Proshare Research

Activity Ratios: Moderating Weakness

EternaPlc has been able to maintain a modest current ratio over the last half decade althoughdownward facing (see chart 4 below). The current ratio of the group fellmarginally by -7.02% Y-on-Y from 1.14 in 2019 to1.06 in 2020. The implication was that the company had maintained a relatively stableshort-term solvency. The company may need to keep higher working capital.

Chart 4: EternaCurrent Ratio 2015-2020

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Source: Eterna FinancialStatement, Proshare Research

Thegroup's acid test ratio showed a decline in the last six years, reaching aperiod low in 2020. The acid test ratio declined by -5.26%Y-on-Y from 0.76 in 2019 to 0.72 in 2020 which was associated with a +30.26% Y-on-Y increase in stock of inventoriesfrom N5.30bn in 2019 to N6.90bn in 2020. This sort of increase ininventory has significant implication on the Group's ability to meet itsshort-term liabilities (see chart 5 below).

Chart 5: Eterna Acid-TestRatio 2015-2020

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Source: EternaFinancial Statement, Proshare Research

Whilethe group's liquidity position has recorded a downward twist from 2016, itrecorded a reversal in 2020 by +30.67% Y-on-Yto 6.05% from 4.63% in 2019 (see chart 6 below). The increase in the group'sliquidity in 2020 was buoyed by increase in liquid assets such as prepayment aswell as cash and cash equivalents. However, the low values of the liquidityratios overtime shows that the Group may be having problem managing itsliquidity which is consistent with its acid test ratio analysis.

Chart 6: EternaLiquidity Ratio 2015-2020 (%)

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Source: EternaFinancial Statement, Proshare Research

Theleverage ratio, a measure of how much capital is in form of borrowing, showedthat the group's debt to equity stood at 93.63% in 2020 up from the 72.79% in2019. The surge in the ratio was driven by the +38.39%Y-on-Y increase in total debt to N12.50bnin 2020 from N9.03bn in 2019 (see chart 7below). To boost its operational efficiency, the Group necessarilyneed to engage in cost cutting strategies that will pull down its rate ofborrowing.

Chart 7: EternaLeverage Ratio 2015-2020 (%)

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Source: EternaFinancial Statement, Proshare Research

Industry-wise,analysts expected the downstream oil and gas subsectors to have greater effectsof the COVID-19 pandemic on their revenue flow than their upstream counterparts.However, analysis of the 2020 FY revenue of upstream and downstream oilcompanies reveals that the pandemic affects their earnings alike though invarying degrees. Surprisingly, one downstream oil company (Ardova Plc) recordedan increase in revenue while the others recorded double digits percent declinein revenue. The severity of the pandemic is felt more by Eterna Plc. The pandemicimpacted significantly on Eterna Oil's revenue in 2020 a decline of about -74% Y-o-Y, the largestdecline across the audited reports of companies listed on the Nigeria Exchange(NGX) year-to-date (YTD) (see illustration 1 below).

Illustration 1 2020 FY Revenue of Audited Oil and Gas CompaniesYTD

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Outlook

The mainconcern for the 2020 FY performance and outlook for 2021 of Eterna Plc is thatthe company declared its profit for the year without consideration for taxes. Abreakdown of the PAT showed that the company had a tax credit of 27% of PBT in theyear yet it further deferred 101.32% of its total tax expenses (which is about N392.90m) for the year. The size of thedeferred tax indicates that the company has accumulated deferred taxes for someyears. However, the historical performance of the company shows it has always acapacity of bouncing back after a period of accumulated tax liabilities.Nonetheless, the reported decline in earnings could still throw chilled waterover investors?óÔé¼Ôäó enthusiasm.